Office Space Company Secret.... Well Kind Of

12/26/2013

Triple Net (NNN), Full Service Gross (FSG), and Modified Gross (MG) Leases Can Be Confusing- Simple Explanation from the Office Space Company Perspective 

If you only negotiate leases on occasion, it may not occur to you that the advertised price of a listing only includes part of the expenses.  If you fail to ask, they landlord or listing broker probably won’t jump to quickly detail every line item expense that you may encounter.  Here is how an office space company thinks about associated leasing costs.

The first figure that you are going to see in every lease is base rent.  Office space companies in commercial real estate will list base rent as an annual per square foot figure.  Commonly, this will range from $10-50 per square foot, depending on the market.  Office space in the largest markets will climb well over that amount.

After the base rent calculation, things start getting a little trickier.  Here is how calculations are handled:

  • Full service gross (FSG): total leasing cost = base rent + parking

  • Modified gross (MG): total leasing cost = base rent + utilities + janitorial + parking

*This is a common way of using modified gross, but modified gross really just refers to some variation of a leasing structure that falls between triple net and full service gross.  It is always wise to confirm with your broker, the listing broker, or the landlord exactly which expenses will be included.

  • Triple net (NNN): total leasing cost = base rent + operating expenses + taxes + utilities + janitorial + parking

The worst realization is when you setup a tour for commercial properties with an office space company thinking that the advertised triple net rent is going to be your monthly amount, when in actuality, it is not even close. 

Here is one example from a building in Downtown Denver.  The space is advertised as 4,720 square feet, at $22/nnn.  On first glance, it would seem your rent is $8,653 per month.  In actuality, the rent would be $8,653 + $1,770 (operating expense of $4.50/sf) + $1,868 (taxes of $4.75/sf) +  $688 (utilities of $1.75/sf) + $197 (janitorial of $.50/sf)+ $2000 (10 parking spots at $200/month) = $15,176.  All of a sudden, that space might have gone well out of your budget range and you just wasted time touring it.  However, the listing office space company is not exactly incentivized to provide all of this information up front, because they want you to tour the space and fall in love with the building (with plenty of encouragement on the broker’s behalf along the way).  Be sure to ask for it up front, or use a tool like Brokrr that will estimate all of your leasing costs before you tour. 

Keep in mind these expenses also still do not include construction, move cost, internet, telecom, cabling, furniture, instillation, and plenty of other expenses you might not have been thinking about.

Some of these categories have also been fairly general.  In case you were wondering what you are paying for in “operating expenses” anyway, here is a breakdown of costs associated with leasing.

Operating Expenses:  Snow removal services, cost of insuring the building, maintenance, electricity, lighting, securitization (systems or watchmen, guards, personnel, etc…), and common area maintenance of any kind.  Janitorial could be included as part of this line item, but we separate it as it tends to be variably included or left out depending on landlord preference, building standards, and geography.   

Taxes: This item is so geographically dependent that we cannot possible create a simple definition that includes everything nearby.  Any office space company like Brokrr could help you out locally with understanding the associated costs here.

Janitorial: This cost is heavily dependent on frequency.  Some buildings will choose not to include it at all, some will provide it 1 day a week, and some will provide it 5 days a week.  Expect for class A buildings to have a much higher likelihood of providing janitorial service. 

Utilities: Pretty self explanatory. 

Parking: In office space, companies will often provide free parking in the suburbs.  Covered parking or garage parking will typically not be free, but that is not always the case.  If you are in a downtown area, expect to have an additional expense included or require your employees to pay for parking if they do not use public transportation.  Best Parking can be a useful resource for estimating associated costs.

Furniture: The commercial furniture market is as diverse a place as they come.  High quality, new furniture can be surprisingly expense for the average company.  Once furniture equipment is bought and installed, its resale value becomes almost non-existent, because the cost to move and install the furniture somewhere else is so high.  In subleases, furniture is often included for this very reason.  Most office space companies will act as if including the leftover furniture is a huge piece of leverage, when in actuality the furniture may be a pain for them to deal with.  That said, some furniture companies make a living by picking up unwanted office furniture, revitalizing it, and reselling it, providing a much needed source of lower cost furniture.  Other lower cost options include large retailers like IKEA, Office Max, etc…, but hiding wiring gets much trickier and there will typically not be any separation if that is something your company needs. 

Furniture is something you can expect to see detailed further in future posts. 

One of the main reasons moving turns into such a painful process for companies is due to the never-ending checklist that comes along with it.  At first thought, it seems easy enough to just find a lease today, sign tomorrow, and move next month, just like you might do with an apartment.  Unfortunately, that is a pipe dream and in all likelihood your move process will take at least a couple months to complete.  To organize all activities related to your move and help make these calculations for you, Brokrr is a free application coupled with a network of local office space companies on the back end to make your move/renegotiation go as smoothly as possible.  Also feel free to contact us at info@brokrr.com or 720.287.1271.